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Pandora Jumps Out of the Box

Shares of internet radio company Pandora Media (P) soared over 20 percent to as high as $12.43 today as it reported better-than-expected numbers for the second quarter and raised guidance for Q3. Impressive growth in mobile-driven revenue also helped to inject renewed confidence that the company can continue to expand in the face of stiffer competition--particularly from the increasingly popular Spotify, Clear Channel's (CCMO) iHeartRadio, or even satellite service SiriusXM (SIRI).

For the quarter, the company reported that net income was break-even and revenue grew 51 percent to $101.3 million. Analysts were expecting a 2 cent loss on revenue of $100.9 million. What stoked the excitement, however, was the 86-percent growth to $59.3 million in mobile revenue. Pandora also said that its active membership grew 50 percent to almost 55 million users.

Investors were also encouraged as two analysts tracking the company--Canaccord Genuity's Michael Graham and So Young Lee of SunTrust Robinson Humphrey--upgraded Pandora to buy from neutral.

Going forward, the company said it expects earnings for Q3 to be in the range of break-even to 1 cent per share on revenue of $115 million to $118 million. Pandora also raised its full-year forecast to a net loss in the range of 4 cents to 8 cents per share on revenue of $425 million to $432 million.

While the company continues to generate growth in revenue and users, concerns such as its ability to fend off competitors. Swedish-based Spotify--which offers customized stations similar to Pandora as well as the ability to listen to individual artists, albums and more--is the most obvious. In June, Spotify unveiled a new service that was a direct aim at Pandora's free mobile service. In the past, only premium Spotify members could use its service on mobile devices. That's no longer the case.

In addition many upstarts rising in popularity, Pandora also faces similar services currently offered or in development from other major corporations. CBS (CBS) owns LAST.fm, Apple's (AAPL) subscription-based iTunes Match, Samsung's (SSNLF) Music Hub and others.

But the biggest concern for Pandora's future business is whether content costs will skyrocket in the next few years. Much like Netflix's (NFLX) struggles in the video streaming arena, Pandora's ability to keep providing fresh content to users while keeping operating expenses low, is and will be the determining factor for its growth.

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